SINGAPORE (June 12): OCBC Investment Research is upgrading its call on Yangzijiang Shipbuilding (YZJ) to “buy” from “hold” previously with a lower fair value estimate of $1.18 from $1.22 before.
The lower fair value comes after updating its SOTP valuation with a 0.65 times P/B for the group’s held-to-maturity assets, which represents a discount to the Chinese banks that now trading at about 0.75 times book.
In a Tuesday report, lead analyst Low Pei Han says in spite of the lower fair value, she sees a good upside to the revised fair value given YZJ’s recent decline in share price, which has fallen by 34% YTD after gaining about 80% in 2017 and hence warrants a re-rating.
Comparing form its peak of $1.74 in Nov 2017, the stock has fallen about 44% to the current price level of about 99 cents, she notes, prompting the group to undertake a share buyback on May 30.
Low nonetheless is positive on YZJ’s prospects going forward is it continues securing contracts, having secured nine effective orders last week totaling to a contract value of US$578 million ($773.3 million).
“With these new orders, the group has clinched a total of 18 effective shipbuilding contracts worth US$846m YTD. This compares to US$2.1 billion in FY17 and US$0.82 billion in FY16,” notes the analyst.
In Low’s view, the group has delivered a commendable performance compared to its peers given its strong execution abilities, net cash position of RMB1.6 billion, and positive operating cash flows over the past four years.
“Though margins are understandably pressured with intense competition in the industry, we have factored this in our estimates. We had also previously highlighted in our earlier report that we expect a drop in shipbuilding margins in 2H18 with elevated raw material costs and a strong RMB against the USD,” she adds.
As at 10.18am, shares in YZJ are trading flat at $1, which is at about 7.5 times blended FY18/19F earnings and 0.6 times forward P/B.
